Sat, Dec 25, 2004 - Page 10 News List

No further interest-rate hikes expected this year

STABLE ECONOMY Despite speculation that the Fed might nudge up its lending rates this month, local analysts said the central bank is unlikely to follow suit

By Amber Chung  /  STAFF REPORTER

Economists said yesterday that they expect no further interest-rate hikes by the central bank before the end of the year, citing Taiwan's currently stable economic environment, amid market speculation that another wave of rate hikes might be in the works as a result of the US' policy to gradually lift its rates.

The central bank is scheduled to hold its quarterly meeting on Thursday to review its currency and interest-rate policies.

"We do not expect [the central bank] to raise interest rates again by the end of this year," Citibank Taiwan's vice president Cheng Cheng-mount (鄭貞茂) said in a phone interview yesterday.

The central bank lifted its benchmark interest rates by an unexpected 0.25 percentage points on Sept. 30, while raising the rediscount rate to 1.625 percent. The secured accommodations rate as well as the unsecured loan rate increased to 2 percent and 3.875 percent, respectively, in the meantime.

The US Federal Reserve announced last week that it was nudging up its interest rates by 0.25 percentage points for the fifth time since June, raising the federal funds rate to 2.25 percent, which sparked local expectations that Tai-wan's central bank would follow.

Wu Chung-shu (吳中書), a research fellow at Academia Sinica,agrees with Cheng.

He said there is no need for Taiwan to raise interest rates at the moment, as there is no urgent threat of inflation or of the economy overheating, given the reasonable pace of an increase in the consumer price index at just over 1 percent on average and the expected deceleration in the GDP growth rate to slightly more than 4 percent in the last quarter of this year and next year.

Nevertheless, in light of the real interest rate hovering at nearly zero percent, a "minor-scale" rate hike might still occur, Wu said.

However, he declined to define how much this could be.

In contrast, JP Morgan Chase Bank retained its expectation for rates to increase by the end of the year, although it adjusted downward its estimate of 0.125 percentage points from its original estimate of 0.25 percentage points.

JP Morgan Chase predicts a total rise of 0.625 percentage points throughout next year, down from 1 percentage point, the bank said in a report released last week.

In the long run, Asian countries should adopt a low-interest rate policy while the US sticks to its policy of raising rates, in a bid to avert the global economy from crashing, another economist warned.

"Global economic growth currently depends on an ever-rising US trade deficit. This is unstable," Morgan Stanley's chief economist for China and Asia, Andy Xie (謝國忠), said in his latest report released earlier this week.

The global economy could crash as the financial markets are selling US dollars to challenge the unstable equilibrium, he said.

"To rebalance the world, the savings rate must rise in the US and fall in Asia," Xie said.

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